Our Funds Research Process

With the thousands of funds available to investors in the offshore hemisphere it is important to establish a thorough and consistent system for choosing funds. Simply following fund managers or trying to “guess the market” are not sufficient.

At Acorn partners we use well respected fund research companies that we use as a basis for choosing funds that make up the panels that we use for our client’s portfolios. We also regularly attend fund management presentations and keep in contact with investment companies on a regular basis.

 

Quantitative and Qualitative Fund screening

The initial fund screening takes the whole sector and applies the following range of measures on a quantitative and qualitative basis to establish a short list of funds that are acceptable with regard to risk and performance.

 

Quantitative – funds are compared against set benchmarks in the following areas :

 

Performance – Fund performance is a good indicator of fund manager ability especially if you look over a range of different market conditions. By assessing performance on a discrete annual basis, you gain a good understanding of how the fund has performed, and therefore the strength of the fund management team in different investment conditions. Performance is measured over the most recent three years on both a discrete and cumulative basis. Performance is then measured against the sector average and funds that do not outperform the average in at least two of the three discrete years are eliminated.

 

Volatility – This is only one of a number of statistical measures that are considered to further understand the funds and how they operate. They are considered in relation to their benchmark and sector and also in relation to their objectives. Again, funds are compared against the average for their sector, but fund aims and objectives are also taken into account. Therefore funds that fail these objectives may still be used taking into account the focus of the funds.

 

TER – The charges taken by the fund manager can have a substantial impact on fund returns and using the total expense ratio (TER) as a measurement of charges it is expected that chosen mainstream funds have a TER of less than 2%.

 

Fund Size – this is taken into account to ensure that funds have sufficient “buying power” although the minimum fund size varies according to the sector. For established funds in the mainstream sectors e.g. Balanced Managed a minimum fund size of £50m is looked for, however, this is reduced to £30m for specific sectors eg. North America. Conversely, funds that are considered too big and cumbersome to deliver strong returns are dismissed.

 

Qualitative – here funds are scrutinized in more detail for how they actually operate. Fund Manager Background – It is essential to ensure that the fund management has sufficient expertise in the area in which it is operating. This involves making a judgment on the relevant experience of the team and also the roles and responsibilities within the team. It is also important to understand these roles and responsibilities so that, if a fund manager leaves, a reasonable assessment can be made of how this will affect the fund management by knowing who will take over and their relevant experience.

 

Fund management processes - Much of the qualitative research is around how the fund operates, and how robust the fund management process is. This involves gaining a full understanding of how the fund is managed, what would trigger the manager to buy or sell a particular stock, what they are looking for in the stocks that they hold etc. It is also important to look at how they monitor the fund holdings on an ongoing basis and how decisions on the fund are made.

 

Risk Controls - The risk controls that are in place are also considered. It is essential that risk is managed according to a robust process and in line with any published risk tolerances.

 

Manager Resources - The resources that the fund manager has available to them can be important in the success of the fund. It is necessary to know what research capabilities there are within the fund management team (clearly important in finding new investment opportunities) and also at whether or not any research is bought in (this can be good as it can provide an alternative view, however in some cases it can indicate a lack of resource within the team). It is important to look at the fund managers other responsibilities. For example if the fund manager has to input heavily into other funds, then this can mean a lack of focus on the core fund, which may also affect future performance.

 

Monitoring Process - Selecting the funds is of course only part of the process – the ongoing monitoring of the holdings and the procedure for making changes is equally important in determining potential returns. It is necessary to therefore consider the process used in monitoring existing holdings – what would trigger a review of a stock, or a sell, and how are such decisions reached. The sectors and funds are monitored on an ongoing basis and reviewed formally on a rolling 3 month basis. The overall process is also reviewed at quarterly Investment Committee meetings.